• USD: Lower, jobless claims decline, housing starts at nine month high, Philly Fed surges
  • JPY: Lower, BOJ holds rate policy steady, says the economy is improving, endorses stronger JPY
  • EUR: Higher, EU trade balance widens as exports rise 4.1%
  • GBP: Higher, CBI factory orders rise to the highest level since January
  • CAD and AUD: AUD & CAD higher, Australia's imports fall, Canada's LEI surged, CPI flat


Overview     
USD traded at a new 2009 low versus the EUR and rebounded versus the JPY Thursday with the EUR supported by report of a sharp rise in EU exports and JPY pressured by selling in cross trade. The rise in EU exports suggests that the global economy continues to recover encouraging demand for higher yielding assets. JPY drifted lower despite report that the BOJ held rate policy steady and upgraded its economic assessment of Japan's economy. In addition, BOJ governor Shirakawa says that a stronger JPY may be beneficial in the long run for Japan. Shirakawa's comments follow recent statements from Japan's new Finance Minister Fujii that he is against intervention to weaken the JPY to benefit Japanese exporters. CHF traded mixed as the SNB elects to hold rate policy steady as expected. There was limited reaction to the SNB statement that the central bank will continue to counter the rise of CHF versus EUR. The SNB statement increases the risk of intervention to try and weaken the CHF. GBP edged higher despite report that UK retail sales were flat in August. Commodity currencies were mixed as the rally in gold slows. AUD experienced light selling pressure in reaction to report that the RBA was an aggressive seller of the AUD in August and Australia's August merchandise imports declined. CAD edged higher despite report that Canada's August CPI came in close to expectations with core rate up just 0.1%. Canada's LEI rose for the second month in a row. US economic data was mixed with initial jobless claims falling more than expected, housing starts rising less than expected, and the September Philly Fed reported well above expectations. Today's US economic data confirms improving outlook for the US labor market and economy but that the data also suggest that the recovery may be weak. The 8k credit for first-time homebuyers will expire next month and this may help explain why single family housing starts were weaker than expected.  USD edged higher after the release of today's US housing and jobless claims reports and turned lower after the release of much better than expected rise in the Philly Fed Manufacturing Index.


USD it is expected to remain on the defensive as the trade continues to price US and global recovery. As the US and global economy improves debate is beginning to emerge over when the FOMC will consider to hike rates and exit quantitative ease. According to the a Washington-based think tank Medley Global Advisors the Fed  is divided over how quickly to raise interest rates once the economy shows sustainable recovery. Medley suggests that two Fed members would support raising rates next week and some members are calling for an early exit from the Feds extraordinary accommodative policy measures. The FOMC meet on September 22nd. Fed rate hike speculation may help limit USD downside but majority consensus is that at FOMC rate hike is a long way off.

Today's US data:
Jobless claims for the week ending 9/12 fall 12k to 545k, a decline of 555k was expected. Continuing claims however continue to rise. US August housing starts rise 1.5% to 598k, housing starts were expected at 600k. August building permits rise 2.7%. Philly Fed came in much better than expected at 14.1, a reading of 6 was expected.

Upcoming US data:
No major US economic data is due for release Friday.

JPY
JPY traded lower pressured by selling in cross trade cross and in reaction to report that that Fed is divided over when to hike interest rates. JPY cross selling is attributed to positive export data from the EU which sparked demand for the EUR/JPY cross. A Washington-based think tank says that the Fed  is divided over how quickly to raise interest rates once the economy shows sustainable recovery and that a number of FOMC board members are discussing the possible timing for exit from quantitative ease. Fed rate hike speculation limits USD selling versus JPY. The BOJ elected to hold interest rate policy steady at 0.10% as expected and upgraded its assessment of the Japanese economy and the financial market outlook. The BOJ said the Japanese economy is showing signs of recovery. The BOJ also appeared to be moving closer towards an exit strategy from bond purchases. BOJ officials are becoming more confident about the recovery in the Japanese and global economy. BOJ Governor Shirakawa said that the central banks intervention in the credit markets was designed to deal with severe crisis that has passed. Shirakawa's comments suggest that there is now less need for the BOJ to purchase bonds to boost liquidity. Shirakawa went on to say that the strong JPY may be positive for Japan in the long run. His comments echo comments from Japan's new Finance Minister Fujii that he is against intervention to weaken the JPY to benefit exporters. Japanese officials are signaling a significant shift away from previous intervention policies favored by the former government to weaken the JPY to support exports. The shift may embolden the trade to buy the JPY because the reduced threat of intervention. Today's Japanese economic data was mixed with Q2 Manufacturing sentiment showing improvement but CAPEX spending declined by 22%. The July tertiary activity index rose by 0.6% and the Reuters Tankan manufacturing index came in at a one-year high at -33 compared to -22 in August. The trade is expected to continue to buy JPY on breaks. According to an analyst at BNP Paribas JPY will trade to 8500 as investors borrow in low-cost currencies like the USD to buy higher yielding assets. It is now cheaper to borrow in USD than in JPY and the USD may emerge as the favored funding currency for carry trades. This could quickly change if the Fed elects to hike rates sooner than expected.

On September 18th revised July leading indicators will be released expected at -8.3% compared to -10.7% at the first release.

Key technical levels to watch in USD/JPY include support at 89.70 the February 11th low with resistance at 91.20 the September 16th high.

EUR
EUR traded at a new high for 2009 supported by improving risk sentiment and report of a sharp rise in EU exports. EU July trade balance improved to 12.6 bln from 5.4 bln last month. Exports rose 4.1%. The rise in EU exports is further confirmation of improving EU and global economic outlook. There was limited reaction to the SNB decision to hold rate policy steady and reaffirm commitment to take action to weaken the CHF versus the EUR. The SNB left its inflation outlook unchanged and indicated that expansionary monetary policy could not be maintained for the next three years. EUR/CHF cross traded steady around 1.5180 after the SNB policy announcement. EUR drifted lower in US session after the release of mixed US economic data which confirmed the US labor market and housing market continues to stabilize but continuing jobless claims rose last week and single-family housing starts were less than expected. EUR rallied to the days high after the releases of much stronger than expected Philly Fed manufacturing index report. In addition, the trade is digesting a think tank report which suggests that some members of FOMC are looking to hike interest rates soon. The major catalyst for the latest decline in the USD has been improving risk appetite as Fed Chairman Bernanke said earlier in the week that the US recession is likely over. As the US economy recovers the trade would be trying to determine whether the US recovery is sustainable which would open the door for Fed rate hikes and an exit from quantitative ease. It's unclear if improving US growth outlook will benefit the USD because low US yields and improving risk appetite  have made the USD the preferred funding currency. The timing of Fed rate hikes will be crucial to USD outlook and how far the USD may decline. Despite the fact that the price of gold is trading at 14 month high Fed officials seem to see limited inflation risk and US officials do not appear to be overly concerned about weaker USD as long as the was declined is orderly. A more rapid fall in the USD and an uptick in inflation could quickly change the FX landscape and Fed policy outlook. US bond yields edged higher today which may have limited USD downside.

The technical outlook for the EUR is positive as EUR trades above 1.4700. Expect EUR support at 1.4560 the September 15th low with resistance at 1.4800 and 1.4910 the August 22nd high.

GBP
GBP edged higher despite report that UK August retail sales were flat. UK August retail sales were unchanged m/m and rose 2.1% year on year. Rising UK unemployment is seen as the major drag on UK retail demand. September CBI order book balance rose to its highest level since January at -48 compared to -54 last month. The improvement in the UK factory orders sparked light demand for the GBP. GBP was also supported by improving risk sentiment. The improvement in UK factory orders helped to support the GBP in cross to the EUR.EUR/GBP is trading around 8900. Analysts at BNP Paribas forecast that the EUR/GBP may rise to parity as investors look to borrow in low yielding currencies like the GBP to finance the purchase of higher yielding assets. According to BNP, continued flooding of the financial system with liquidity by the BOE will weaken the GBP and BNP analysts note that GBP will likely continue to underperform. It was reported earlier in the week that the BOE may be considering cutting the reserve rate for UK banks. There remains a great deal of uncertainty about BOE policy outlook and the outlook for the UK economy. This limits the impact of improving risk sentiment which has been driving the USD lower against most major currencies. If the BOE elects to cut the reserve rate that it pays on UK bank funds it would effectively be an expansion of quantitative ease and an indication that the BOE lacks confidence in the UK economic outlook. GBP is expected to continue to underperform pressured speculation the BOE may have to take further action to ease monetary policy to boost growth. Focus turns to Friday's release of UK public sector borrowing. GBP remains vulnerable to concern about increased UK government debt. A larger than expected rise in public sector borrowing could spark fresh selling of the GBP.

On September 18th August public sector borrowing will be released expected 8.602 bln compared to 8.016 bln last month.

The technical outlook for GBP is mixed as GBP falls below 1.6500. Expect near-term support at 1.6320 the September 8th low with resistance at 1.6660 the September 15th high.

CAD
CAD traded higher Thursday supported by continued improvement in risk sentiment as global equity markets rise to new highs for 2009. CAD was also supported by report of stronger than expected rise in Canada's leading indicators. Canada's August LEI rose 1.1%, economists had expected a 0.4% rise. This marked the second consecutive monthly gain for Canada's LEI. The LEI report follows Wednesday's report that Canada's manufacturing shipments rose twice as much as expected in July. These data suggest that the Canadian economy is improving. There was little reaction to report that Canada's inflation came in as expected. Canada's August CPI rose 3% m/m, and 1.6% y/y. The core inflation rate rose by just 0.1%. BOJ inflation target is 2%. AT last week's BOC policy meeting the BOC reaffirmed its commitment to hold interest rates at 0.25% until mid-2010 provided inflation remains in check. Today's CPI data is unlikely to change the outlook for steady BOC rate policy. CAD has benefited from rising gold prices and improving outlook for the US and global economy. Optimism about the US and global recovery fuels demand for growth linked currencies. Last week the BOC elected to hold policy steady, refrained from implementation of nonconventional monetary measures and expressed concern about the strength of the CAD. The threat of intervention is the main risk to further CAD gains. CAD price direction will continue to track the direction of equities and commodity prices.

On September 18th July wholesale sales will be released expected at 0.8% compared to 0.6% last month.

The technical outlook for CAD is positive as USD/CAD falls below 1.1070. Look for near-term support at 1.0550 the October 1st low with resistance at 1.10805 the September 15th high.

 

AUD
AUD traded mixed consolidating recent gains with upside limited by report of a drop in Australian imports and weaker gold prices. Australia's Q2 merchandise imports declined by 7%. The decline in imports may be a red flag that the Australian domestic economy is not recovering as quickly as expected. AUD was also pressured by report that the RBA aggressively sold the AUD in August. Although the RBA selling of AUD was less than the prior two months the RBA sold A$576 mln in August. This compares to sales of A$705 mln in July and A$1.94 bln in June. Clearly the RBA has been less aggressive in intervening to try to weaken the AUD. This may reflect the fact that the AUD rally is supported by improving fundamentals and the prospect for an RBA rate hike before year-end. In other words, the RBA selling of AUD is more of a smoothing operation than an effort to try to weaken the AUD.AUD has been one of the best-performing currencies supported by the global recovery theme and speculation that improving economic outlook will encourage the RBA to hike interest rates before year-end. The minutes for the September RBA policy meeting said that the RBA expects rates to rise if the recovery sustained. The RBA went on to say that inflation remains relatively high. The RBA is expected to hold off on a rate hike until Australian economic data confirms the recovery is sustainable. A number of analysts expect the AUD to trade above 9000 in the months ahead. There are no major Australian economic reports due for release the remainder of the week. AUD price direction will key on the direction of equities, commodities and speculation about the global recovery. The straight-line rise in equity markets and improvement risk sentiment fuels AUD demand.

The technical outlook for the AUD is positive as AUD rallies above 8700. Expect AUD support at 8640 with resistance at 8820 the August 28th high.